'Hard' inquiries have limited credit score impact

Dear Credit Score Report,
Is it true that if your credit has been checked too many times it could affect your score? How many times can we check our credit without affecting the score? Please advise me. -- Claudia V.

Hey Claudia,
Although it's true that your credit score can fall slightly following some types of credit checks, experts say looking at your own credit history won't impact your score.

Credit checks -- or credit inquiries -- are designated as either "hard" or "soft." When you apply for credit, each hard inquiry by lenders can reduce your credit score by a few points. However, when you shop around for auto, student or mortgage loans during a short time frame, it results in a single inquiry, lessening the scoring damage of having multiple credit checks. By contrast, your credit score won't be affected by a soft inquiry, such as when you get a copy of your own credit history. "You can check your own credit report as many times as you'd like and it will never impact your score," says Rod Griffin, director of public education for credit bureau Experian.

There's a reason for that, according to FICO, creator of the leading credit scoring model. "[W]hen people check their own credit scores, they are not viewed as seeking new credit, but instead are seen as demonstrating responsible credit management practices," says Barry Paperno, consumer operations manager for myFICO.com.

Other "soft" credit inquiries include:

Inquiries made by an existing lender as part of their regular loan management procedures.

Inquiries made by banks or businesses looking to prequalify consumers for certain marketing offers.

Inquiries made for employment purposes, such as hiring decisions.

Inquiries made by insurance companies.

These soft inquiries won't appear to lenders who pull your credit history. "Such checks are recorded only in the credit report that you see when you request it yourself directly from the credit reporting company, through AnnualCreditReport.com, a subscription to a credit monitoring service or by following the instructions provided in a declination letter from a lender," Griffin says.

Banks and other businesses, meanwhile, do see records of any hard inquiries on your credit history. "[C]redit checks performed by lenders in relation to an application for credit do appear on the credit report that is seen by lenders and can potentially impact your scores," Griffin says in an e-mail. FICO explains why: "An inquiry from a lender typically means a consumer is taking on additional debt, which can lead to additional credit risk in the eyes of a lender and a slightly lower FICO score for the consumer," Paperno says. However, any resulting drop in your credit score is likely to be small. According to FICO's website, a hard inquiry will typically take less than five points off a borrower's credit score. Experts say the exact impact is based on that individual's credit. "For a person with a very strong credit history, no delinquencies, etc., an inquiry may have zero affect on the score. For a person with late payments, collection accounts or other serious issues, an inquiry may affect the score by several points," Griffin says in an e-mail. Still, those inquiries can add up. "Each hard inquiry has a minimal impact on a credit score, but that impact is multiplied with each additional inquiry," says Steve Katz, spokesman for credit bureau TransUnion. "Consumers should avoid applying for mulitple new credit or loan accounts over a short period of time to help ensure that they do not appear 'credit hungry' in the eyes of lenders," Katz says.

Federal law requires that any damaging inquiries be listed as a risk factor on a credit report. "So, even if inquiries cause a one point change, they will be listed along with other elements as a factor affecting the score," Griffin says.

To prevent credit score damage due to multiple hard inquiries over a short time period, scoring models recognize that borrowers often shop around for the best loan. "Looking for a mortgage, auto or student loan may cause multiple lenders to request your credit report, even though you are only looking for one loan," FICO's website explains. For purposes of calculating the credit score, "inquiries for mortgage lending and auto lending purposes within a given period of time, generally 14 days, are counted by most credit scoring systems as a single inquiry," Griffin says. "There is no limit to the number of inquiries for those purposes," he says.

While auto, mortgage and student loan applications over a brief period are treated as a single inquiry, that isn't the case for credit cards. For consumers, "this means that each additional credit card inquiry can potentially hurt your score -- although by less than 5 points each in most cases," Paperno says. "For this reason, randomly applying for credit cards is not a good idea. Instead, when credit card shopping, consumers should first do their homework by comparing rates, terms and features being offered by lenders, and then only apply for the cards that best meet their needs." Of course, one place to do that is here at CreditCards.com.

Still, it's unlikely that credit checks will prevent you from borrowing. "Inquiries alone will never be the reason an application is declined," Griffin says. That means as long as your credit report shows a record of on-time payments, low debt levels and is free from damaging errors, you don't need to worry much about having your credit checked from time to time.

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